Private passions

IF WATER is best treated as a normal business, that runs slap into the most controversial issue of all, which exercises the activists more than any other: the idea that the private sector can and should provide water and sanitation services. Some critics are against all forms of privatisation; others work for public-sector unions, so they have an axe to grind. Many think that, because water falls from the sky, it should be free. Others argue that, as “water is for life”, it is wrong to sell or trade the stuff for a profit. It is notable that those who most fervently hold such beliefs often come from countries such as Canada, rich in both money and water.

The opposing side holds equally strong views, arguing that many public utilities have shown themselves incapable of delivering water and sanitation satisfactorily, so private companies should be given the opportunity to do better. In the 1990s, the World Bank seemed to espouse this view. Much of the Camdessus report is devoted to suggestions for helping the private sector win contracts in developing countries. Yet that may be ignoring a simple arithmetical fact: at present over 90% of the world's water is delivered by publicly owned bodies, so there is no doubt that the Johannesburg goals will have to be met substantially by the public sector.

Private suppliers have in fact long played a role in water. Most of today's municipal and state-owned water utilities in America and other rich countries began life as private companies. Strikingly, in France most municipalities have for almost 150 years been supplied by one of the two giants that still dominate the world water industry: Générale des Eaux, now owned by Veolia (formerly Vivendi Environnement), and Lyonnaise des Eaux, now owned by Suez (see article).

The best test of the private v public argument is, however, to be found across the English Channel. Until 1989, most British water was delivered by public utilities, organised around river basins rather than municipalities. As in America, there were some small private companies, but these were little more than historical curiosities. Yet in 1989 the privatisation programme introduced by the then prime minister, Margaret Thatcher, reached water, and all ten English and Welsh water utilities were floated on the stockmarket. Instead of retaining the assets in public hands and franchising out operations and maintenance, as France had done, the British government chose to privatise the assets as well.

English lessons

How does the record look 14 years on? In terms of quality, service delivery and efficiency, the answer is excellent; in terms of stockmarket performance, less so. At the time of privatisation, thanks to years of Treasury cheese-paring, the British water utilities faced a daunting backlog of capital investment needed to comply with European water-quality directives. This persuaded the government to hand the new water companies a lavish dowry. They were forgiven all their debt and allowed to hike up prices. Sir Ian Byatt, the first director of Ofwat, the new water regulator, now concedes that the initial regime was too generous; shareholders who bought at flotation made a killing, prompting the Labour opposition to hatch plans for a windfall tax when they returned to power.

Ofwat's price regime was tightened at reviews in 1994 and 1999. By then most of the much-needed capital investment had been made, and efficiency gains had kicked in. Yet several utilities, especially those that had taken on the biggest debts, were feeling the pinch. A painful windfall tax was duly imposed in 1997, and shareholders began to grumble. Mergers between utilities were frowned on by the regulator, so that avenue to cost-cutting was closed, and the utilities had to look for other solutions. Some merged with regional electricity companies, others were sold to the French or other foreign companies. Welsh and Yorkshire (now Kelda) Water pondered becoming mutually owned companies. The regulator blocked Kelda's plan, but allowed the sale of Welsh Water to Glas Cymru, a sort of mutual owned by a group of local investors. Table 4 summarises the utilities' present status.

Does such a topsy-turvy experience deserve a favourable verdict? The answer is to be found north of the border, in Scotland. In 1989, Scotland's water was comparable to the English utilities in every respect, but the government kept it in public hands. For a while, the Scots benefited from lower bills. But as the new Scottish regulator, Alan Sutherland, recently conceded, things look different now. Scottish Water is less efficient than its southern peers, its service delivery is poorer and its water quality is worse; it is, in short, ten years behind. To catch up, it is having to raise water tariffs above English levels. The Scots, it turns out, are paying a high price for keeping their water in public hands.

Yet not everything about British privatisation has gone swimmingly. Household metering, a precondition for sensible pricing, remains limited, with only a 50% coverage at best (Anglia). This is partly because in 1997 the new Labour government made metering voluntary: a policy that was bound to fail, because the only people likely to volunteer to have a meter installed are those who think they consume less than average and will receive lower bills. On the delivery side, Yorkshire Water suffered embarrassing water cut-offs during a drought in 1995-96. And because of the regulator's opposition to mergers, no strong national champion has emerged to challenge the French. Only Thames has a substantial presence abroad, and it is now owned by Germany's RWE.

One lesson the British utilities have learnt is that privatisation cannot mean they are free to conduct their business as they wish. Because water supply is a natural local monopoly, any privatisation requires a strong and permanent public regulator. In a sense, privatisation is a misnomer. The water remains under government control; tariffs and services remain tightly regulated; and even if assets such as sewers and pumping stations are transferred to a private company, their use is circumscribed, and the companies are licensed to operate only for 25 years. Formally speaking, London's famous Victorian sewers are “owned” by a German company—but not in the sense in which the makers of Rolls-Royce cars are owned by a German company.

Few other countries are willing to go down the British route, even if they acknowledge its successes. More are attracted by the French model: keep the assets in public hands, but contract out investment, operations and maintenance. Among rich countries, America has toyed with this, and a number of cities have offered concessions to both American and foreign companies, though the results have not always been happy. For example, Atlanta first let and then cancelled a contract with Suez. In Europe, Germany is sticking to public ownership (except for Berlin). In Spain, however, half the water is supplied by private firms, the biggest being Aguas de Barcelona, controlled by Suez. But the real opportunities for the private sector lie in poorer countries, where public provision has so often been inadequate.

The four biggest private companies are Suez, which claims 125m customers, Veolia, with 110m, Thames (now RWE), with 70m, and Saur, part of France's Bouygues construction group, which has 25m. In the 1990s, all of them duly piled into the developing world, but none of them has had a happy time there. Peter Woicke, head of the World Bank's private-sector arm, the International Finance Corporation (IFC), notes that if any water company were to announce that it was quitting emerging markets, its share price would go up. The companies have learnt that the risks of setting up in a developing country are greater than they thought—and the rewards lower than they hoped.

In Manila, for instance, the World Bank had thrice lent money to the municipal utility, only to find that universal coverage remained a distant goal, much of the cash was siphoned off and half the water was still disappearing through leaks or theft. So in 1997 it encouraged the Philippine government to let a concession to a Suez subsidiary. Last December, the subsidiary pulled out, citing big debts, disputes with the municipality over its failure to invest and an argument over price increases. For similar reasons, Suez is also thinking of quitting Jakarta, though its co-concessionaire, Thames Water, is hoping to stay.

The real test bed, however, has been Latin America. There, too, the World Bank encouraged cash-strapped governments to let water concessions to the big private companies, especially Suez and Vivendi. For a time the model was Buenos Aires, where the concession was awarded to a subsidiary owned mainly by Suez, Aguas Argentinas (the IFC also had a stake). The contractor managed to cut water tariffs and to extend 24-hour service to an extra 3m poor people, who found that their piped supplies cost one-tenth or less of what they had been paying to private water vendors. Unfortunately, the catastrophic Argentine devaluation of early 2002 destroyed the economics of the operation; the government refused to let Aguas Argentinas invoke a clause allowing it to raise prices to offset the devaluation, and Suez pulled out. The dispute is now in the arbitration courts.

In Bolivia, three big cities, La Paz, Santa Cruz and Cochabamba, all devised schemes to improve chronically deficient water supplies (in a country with above-average rainfall). La Paz awarded a contract to a Suez subsidiary; this has extended supply to the poorer El Alto region of the city. Santa Cruz chose to improve the municipal water utility instead, using World Bank loans, as La Paz had done (and so disproving the myth that the Bank lends only to privatised schemes).

Cochabamba had bigger ambitions. The local mayor wanted to build a large dam and tunnel to tap another watershed. Again the World Bank was asked to help, but refused on the ground that the scheme was too costly and unnecessary. The Bolivian government went ahead anyway and gave a contract to a consortium in which Bechtel, an American construction firm, was the lead partner. But when the consortium doubled water tariffs to pay for the investment, and some people found themselves spending one-third of their income on water, protests erupted, culminating in mass demonstrations in the main square in early 2000 during which a 17-year-old boy was shot dead by a soldier. The government panicked, the project was scrapped and the water contract was torn up. The Bechtel-led consortium is now suing for $25m in damages.

Don't do as the Cochabambans did

What are the lessons from Cochabamba? It has become the poster child for the anti-privatisation brigade. In this, most NGOs, as well as the media, have taken their lead from Oscar Olivera, a quietly spoken but forceful shoemaker and union leader who found himself leading the protests. Mr Olivera is firmly against any privatisation of water. He proudly declares that, now that the consortium has been seen off, water tariffs are back where they were before it arrived; and that Semapa, the local utility, has been restructured and improved with the help of a some cash lent by the Inter-American Development Bank. Yet the fact is that 40% of Cochabambans today still lack access to water—just as many as did before the private contract was let.

The correct conclusion from the Cochabamba fiasco has little to do with privatisation. The mayor and the Bolivian government were wrong to insist on an expensive and unnecessary dam. But the bigger problem was that Semapa's water tariffs had been too low for too long, starving the system of investment. Had the tariffs been raised earlier, more cash would have been available to improve service. These twin failings meant that any new contract, public or private, was bound to lead to unacceptable price rises.

One observer of privatisation projects, Michael Rouse of the International Water Association, sums up the issue: “There have been successes with public/private partnerships, and there have been failures. The key requirement is good governance and the right institutional framework, notably effective regulation.” Unless this requirement is met more often, private companies may continue to be unenthusiastic about projects in developing countries (see chart 6). One way forward could be more creativeness in the use made of the private sector. The companies have much to offer in services, operations, maintenance and billing. But they cannot be substitutes for good local government; nor, as Suez's Mr Mestrallet laments after the Argentine mess, are they bankers.

Jeremy Pelczer of Thames Water talks of developing new kinds of partnerships between the public and the private sector, with companies such as Thames taking only a 20-25% equity stake in special-purpose vehicles. Thames also works on joint projects with NGOs such as WaterAid. Mr Pelczer says his ambition is to be “the easyJet of the water business”, supplying know-how and management skills, but in conjunction with other bodies. This also offers a way to harness private-sector expertise for water and sanitation in rural and small-town areas: on their own, the big companies will never be interested in anything much smaller than a city of 500,000 people.

The Camdessus report contains some good ideas for financing public/private partnerships in water. One of them, modelled on American experience, is to raise money from local investors in poor countries through bond issues. A second, aimed at the Argentina problem, is to set up a devaluation backstop facility that will pay out in the event of a sudden collapse in the exchange rate. A third is to make it easier for international bodies to lend to sub-sovereign entities such as municipalities. The IFC's Mr Woicke, who was a member of the Camdessus panel, points out that 90% of water is provided by local entities, so he is especially keen on this plan. The IFC has recently made its first such loan, to a Mexican municipal water supplier.

Big cities in developing countries are certainly in need of reform. India offers some telling examples, one of the best being the capital, Delhi. Sumi Tripathi, chairman of the Delhi Jal Board, the municipal utility, proudly claims to deliver water to 86% of the 14m-strong population. Average consumption is 225 litres per day per head, comparable with levels in many rich western cities. Yet absurdly low prices, which cover only 4% of total costs, mean not only that much water is wasted or lost, but also that the board has too little money for investment. Local politicians will not allow water tariffs to be raised.

In fact, the situation in Delhi is even worse than this suggests. There are few water meters, and those that are installed soon break down, because they need constant, 24-hour pressure to function. Large parts of the city, especially the slums, get water for only a few minutes a day. Illegal tapping into groundwater is widespread, so the water table is falling fast. And because most of the cheap piped water goes mainly to better-off areas, as Sumita Dasgupta of the Centre for Science and Environment points out, the urban poor are, in effect, subsidising the urban rich.

The Delhi Jal Board has let a small private contract for waste-water treatment, even though local politicians in India are generally against using the private sector to improve their utilities. But if the Johannesburg goals are to be met, the private sector's skills in water will have to be harnessed in some way. Most important of all, private involvement—or the threat of it—can be an effective method of forcing reform on bloated and corrupt municipal utilities. As the Camdessus report puts it, “The prospect of private-sector participation in its various forms can be a powerful spur to the reform of public water agencies, whether it actually happens or not.”

But if water supply is to be improved, that will also mean tackling the green lobby's other big bugbear: dams.

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